Identify the risks in a convertible arbitrage strategy that takes long positions in convertible bonds hedged with short positions in treasuries and the underlying stock.
A.short implied volatility
B.long duration
C.long stock delta
D.positive gamma
Answer:D
This position is hedged against interest rate risk,so B is wrong.It is also hedged against directional movements in the stock,so C is wrong.The position is long an option(option to convert the bond into the stock)and so is long implied volatility,so A is wrong.Long options positions have positive gamma.
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